The Public Sources of Prosperity

Conservatives and deficit hawks who see government spending as a drain on the economy imagine that economic growth in the United States has stemmed only from private investment and innovation. But from the earliest days of the Republic, government at all levels has played a critical role in expanding the economy. The development of transportation -- from lighthouses, harbors, inland waterways, canals, and railroads to highways and airports -- has been the most obvious contribution. The government's role in technological innovation, often for military purposes, has also been central. In the 19th century, federal armories pioneered mass production based on interchangeable parts. During World War I, public investment laid the basis for the radio and aerospace industries. World War II and the Cold War led to advances in biotechnology, energy, and computers and electronics.

Alexander Field's ironically titled book, A Great Leap Forward: 1930s Depression and U.S. Economic Growth, adds new evidence for the productive role of public spending. It also changes our view of what happened in the American economy during the 1930s, when military investment was not a driving force. According to Field's analysis, the Depression years were a period when the economy made dramatic gains in productivity, preparing the ground for the advances of later decades.

Field is an economic historian who uses the method of growth accounting developed by such earlier scholars as Moses Abramovitz, Robert Solow, and John Kendrick. In the 1950s, Abramovitz and Solow concluded that much of 20th-century economic growth was a result of something other than additional labor and capital. During the 1920s, according to their research, factories had become more productive because of technological advances in machinery, organizational and logistical advances resulting from electrification, and improved skills of workers.

Following in this tradition, Field analyzes changes in total factor productivity, a statistical method that highlights growth that occurs independent of increases in conventional capital and labor inputs. His surprising finding is that the United States made big gains in total factor productivity from 1929 to 1941. Some of the increase, Field suggests, came from the continuing improvements in efficiency from electrification as well as new inventions from corporate laboratories. There were also, however, very large productivity gains in transportation and retail trade, which he traces to public investments in transportation infrastructure.

Field argues that a national consensus had formed by the late 1920s that big investments were necessary to improve roads for cars and trucks, and he thinks these outlays would have occurred had the Great Depression been averted. His point, though, is that well before Eisenhower's initiative to build the interstate highway system in the 1950s, public investment in roads in the 1930s made a dramatic contribution to economic efficiency.

Field's evidence shows what's wrong with the oversimplified conservative view of public spending. Under the 2009 American Recovery and Reinvestment Act, the federal government made major investments in clean-energy technology. Rather than providing just a temporary stimulus, those investments stand to yield long-term gains in productivity. Just as the initial construction of an electrical grid contributed to the productivity gains of the 1920s and 1930s, so we should expect similar gains from building a new, "smart" national electrical grid.

Perhaps, though, Field's most important contribution comes in two chapters late in the book in which he spells out the economic costs of ineffective government regulation. He makes a fascinating case that inadequate government controls over land use in the 1920s led to irrational and inefficient patterns of suburban development. Similarly, in the chapter "Financial Fragility and Recovery," comparing the speculative boom of the 1920s with the one that culminated in the 2007-2009 financial crisis, he sees inadequate regulation of financial institutions as the primary source of instability.

Field's analysis draws heavily on the work of the economist Hyman Minsky, who argued in the 1970s and 1980s that the search for profits would drive bankers to ever riskier financial investments and the only effective counterforce was tough governmental regulation that placed strict limits on the risks and leverage of the financial sector. Unfortunately, Alan Greenspan and other regulators in the Clinton and George W. Bush administrations imagined instead that the self-interest of financial managers would prevent them from taking on excessive risks. The costs of that mistake are incalculable.